On August 11, 2026, the Department of the Treasury and Internal Revenue Service (IRS) published a proposed rule addressing Trump Account Contribution Programs (TACPs) and amending the nondiscrimination rules for Dependent Care Assistance Programs (DCAPs).
The IRS indicates taxpayers may rely on these proposed rules until a final rule is published. So, while employers may still need more time to review and implement TACPs (as the IRS is still asking for comments on logistics), the proposed DCAP nondiscrimination testing changes can be relied upon now until a final rule is published.
Applies to:
Employer of any size sponsoring a DCAP, and employer of any size interested in sponsoring a TACP.
Go Deeper:
Several TACP rules under Internal Revenue Code (IRC) Section 128 are similar to the rules applicable to DCAPs under §129. In particular, three of the four DCAP nondiscrimination tests will apply, so the proposed guidance introduces some improvements to the DCAP nondiscrimination rules that will also apply to TACP nondiscrimination.
Proposed DCAP Nondiscrimination Changes (which may be relied upon immediately and also apply to TACPs)
- Eligibility Test: The DCAP must be offered to employees on a nondiscriminatory basis. To better define what the IRS finds nondiscriminatory, the proposed rules provide a new numerical safe harbor for the Eligibility Test. The safe harbor deems a class nondiscriminatory if the percentage of non-highly compensated employees (non-HCEs) eligible for the program is at least 90% of the percentage of highly compensated employees (HCEs) who are eligible. In other words, if all HCEs are eligible, the eligibility safe harbor can be passed if at least 90% of all non-HCEs are eligible.
Employers with a higher concentration of non-HCEs may be able to satisfy the safe harbor using a lower percentage. For each percent non-HCEs comprise more than 60% of all employees, the safe harbor percentage can be ¾ of a percent lower.
For example, if 80% of all employees are non-HCEs, then the non-HCE concentration test is 20 percentage points higher than 60%, so the 90% safe harbor percentage can be reduced by 15 percentage points to 75% (20×0.75=15). In that example, if all HCEs are eligible, the eligibility safe harbor can be passed if at least 75% of all non-HCEs are eligible.
Employers that do not satisfy the safe harbor may still be able to pass under a facts-and-circumstances analysis.
Passing the Eligibility Test does not mean the program automatically passes nondiscrimination testing overall. The program would still need to satisfy the other applicable tests, such as the Contributions and Benefits Test and the 55% Average Benefits Test (and, in the case of DCAPs, the More-than-5% Owners Concentration Test).
- 55% Average Benefits Test: The most consequential proposal would amend the 55% Average Benefits Test to only account for employees receiving more than $0 in DCAP benefits during the year. Employees receiving no DCAP benefits would no longer need to be included in the denominator of that test.
This means the average for non-HCEs will be an actual average of just those participating, rather than being dragged down to a significantly lower average by a substantial number of $0 values from those not participating.
This may help employers who were hesitant to adopt the increased $7,500 DCAP contribution limit be more comfortable with adopting the increased allowance.
- End-of-Year Testing Failure: A new remedial rule would allow a failure of the 55% Average Benefits Test (and, in the case of DCAPs, the More-than-5% Owners Concentration Test) on the last day of the year to simply add the excess benefits as taxable income on the W-2 of affected HCEs/owners by the Form W-2 furnishing deadline (usually January 31) immediately following the year of the failure.
Currently, when employers do not discover failures until the end of the year, HCEs/owners potentially get taxed on the entirety of benefits they received from the DCAP. So, employers endeavor to cure failures before the end of the year to ensure affected HCEs can get at least some tax-favored DCAP reimbursements.
As a reminder, pass-through entity owners (and certain employed family members of more-than-2% S-corp shareholders) cannot participate in the DCAP on a pre-tax basis, so they usually do not make DCAP elections.
Proposed TACP Guidance
The proposed rule’s guidance on TACPs included the following provisions and requirements:
- Written plan document required, including required content elements.
- Reasonable notification of availability and terms (without prescribing specific content or furnishing methods).
- Annual written statement (typically via W-2 box 12 using code TA).
- Optional employee certification that this is a request to contribute to a qualifying Trump Account (must be in writing, either paper or electronic, with specific representations made unless the employer has actual knowledge that the certification is incorrect).
- Employer communication protocols with Trump Account trustees (this is where most comments are still needed to provide employers with electronic transaction protocols).
- Employer prohibition on restricting contributions to certain Trump Account trustees.
- Section 125 rules, including a requirement to allow employees to make prospective election changes at least monthly without the need for a qualifying event (similar to HSAs).
- As a reminder, employees can only make pre-tax salary reductions toward the Trump Account of their dependent, not toward an employee’s own Trump Account.
- It would appear a TACP can simply be written into the §125 cafeteria plan document, much like DCAPs are today.
- Clarification that an employee may not receive more than $2,500 per year in tax-favored TACP contributions across all employers they might work for that year (subject to future indexing after 2027), regardless of the number of qualifying dependents.
- Any excess TACP contributions will be taxable compensation.
- A married couple filing jointly and working for the same employer or controlled group of employers may each receive the full TACP.
- Only one parent may claim a dependent for divorced or separated parents or married taxpayers filing separately (similar to DCAPs).
- Self-employed owners are not eligible for TACP contributions.
- Delineation that TACP contributions are excludable from federal income taxes but not excludable from other payroll taxes (i.e, employees and employers cannot glean FICA/FUTA savings).
- Employer Pilot Match Contributions that meet the safe harbor are disregarded for the contributions-and-benefits requirement and the average-benefits test, but remain relevant for the eligibility test.
Practical Impact to Employers:
Since the proposed rule can be relied upon immediately:
- DCAP nondiscrimination testing may be run using updated criteria, including:
- The 55% Average Benefits Test can exclude employees receiving no DCAP benefits from the denominator, and
- A failure of that test or More-than-5% Owners Concentration Test may be rectified by including the excess in affected individuals’ gross income by the W-2 distribution date immediately following the year of the failure.
- The 90% Eligibility Safe Harbor Percentage can also be relied upon now, but most employers have not been struggling with the Eligibility Test for DCAPs.
- Employers should work with their testing vendors to determine the earliest date at which the vendor can facilitate updated testing.
- The comment period is open through September 25, 2026. Comments are requested on specific TACP and DCAP administrative provisions, such as:
- What electronic mechanisms should be available to allow employers or service providers to verify that the designated accounts are valid Trump accounts. For example, to ensure these are not the Trump Accounts of non-tax dependent children.
- How best to address operational challenges of corrective notices/actions.
- For DCAPs, whether any additional information would be helpful in applying the average benefits test.
COMMENTS